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Business News/ Opinion / Columns/  Opinion | Can India grow at 7% with all the macro-headwinds?
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Opinion | Can India grow at 7% with all the macro-headwinds?

With countries enacting lockdowns, the stress on financial system is bound to increase as companies find an unprecedented mismatch in their cash flow
  • Successive policy action can ensure that we mitigate a full-blown financial crisis by coordinated monetary policy action along with regulatory forbearance.
  • As long as we’re able to take adequate policy measures, we can expect a swift recovery in the second half of the coming financial year and eventually grow at 6-7% in the following year.Premium
    As long as we’re able to take adequate policy measures, we can expect a swift recovery in the second half of the coming financial year and eventually grow at 6-7% in the following year.

    The West found itself immersed in the damage caused to its economic and health systems by the pandemic since early months of 2020. For emerging markets in Asia and Latin America, it seems the disease managed to infect their economies even before a full-blown health crisis descended upon them. Facing double crisis in a spaced out but rapid manner, these economies found themselves in the eye of a storm.

    Investors have pulled out over $83 billion from emerging markets since the beginning of covid-19 outbreak, recording the largest capital outflow ever. The slump in crude oil prices dragged down prices of other commodities, which are the bread and butter of many developing economies, and put a halt to their business activities. The economic shock further exposes these markets to mounting debt, making their currencies fragile. The persistent strength in the dollar has pushed some major currencies to depreciate to all-time lows. This includes the Indian Rupee, Mexican Peso and Brazilian Real.

    After almost a decade of extensive borrowing both public and private in nature, the developing economies are suddenly exposed to a halt in capital inflows, thereby significantly increasing the borrowing costs for both businesses and governments. The International Monetary Fund has pledged to utilize its full lending capacity of $1 trillion, wherein $50 billion is reserved for emerging markets. World Bank too has pledged another $14 billion to businesses and governments through fast-track finance. But, they need to be ready to provide balance-of-payments support in a timely fashion to the many countries who would request, sometimes without even sending a mission. Speed and flexibility will be crucial if the virus hits the emerging markets as hard as it did the advanced ones.

    For India, the situation might seem tougher given the relatively less developed economic structure. Handling of the crisis by concerned authorities will play a crucial role in how investors perceive the Indian financial market. In March, foreign institutional investors (FII) pulled out over 65,000 crore from the Indian market, making the situation bleak for Sensex and Nifty. At the same time, we also saw trading halts due to high volatility in the market after almost 11 years.

    The fall in stock markets around the world is much on account of uncertainty. Concerns over the possible aggravation of the situation, uncertainty over the time period of pandemic containment and its impact on economic activity play a decisive role in investor behaviour. The drop in oil prices might work for India’s current account, as we are an oil-importing country. However, extremely low prices might lower global growth and in turn affect India’s exports and remittances coming into the country.

    The developing world is forced to think of possible routes the crisis can infiltrate from, and the paths to recovery. Questions vis-à-vis if economies will return to their pre-covid 19 output and growth levels and if there would be a structural legacy from this crisis, would take the centrestage. This is of course a question that will be discussed over successive months as countries experience one of the worst economic slumps, comparable to Great Depression, if not worse.

    The key factor worth considering is that the present economic challenge is unlike a conventional demand or supply shock. It is a simultaneous combination of demand and supply shock. With countries enacting lockdowns, the stress on financial system is bound to increase as companies find an unprecedented mismatch in their cash flow. The question that thus emerges is whether the current economic crisis will cause a full-blown financial crisis.

    Successive policy action can ensure that we mitigate a full-blown financial crisis by coordinated monetary policy action along with regulatory forbearance.

    But there are two issues of importance here. First is to do with short-run implications of the crisis and uncertainty. It is precisely here that governments need to step up with some measures that can reduce the uncertainty as much as possible. Moreover, most economies have already enacted strong fiscal measures and are trying to absorb the economic shock as much as possible. This is important in the context of India as lockdowns push a lot of companies closer to their shutdown point, especially in industries with high fixed costs.

    The prospects of shutdowns are scary for two reasons both in short and long run. First is that it represents a permanent reduction in jobs rather than a temporary retrenchment. This would invariably translate into a permanent income loss which will have implications for our aggregate demand. A permanent income loss would therefore only flatten the bottoming out of the economy thereby prolonging the prospects of recovery. The other issue would be a reduction in the trend rate of growth due to significant exits of firms across sectors.

    There is indeed a possibility of the crisis resulting in lower levels of potential growth for some countries. However, this would be contingent on the extent of policy response from successive governments. The ability to prevent shutdowns through redirection of cheaper credit combined with fiscal incentives would therefore prove to be crucial in restarting economic activity and averting the situation of firms shutting shop.

    India’s strong fundamentals place it comfortably to undertake bold policy measures needed to address the economic fallout of covid-19. As long as we’re able to take adequate policy measures, we can expect a swift recovery in the second half of the coming financial year and eventually grow at 6-7% in the year that follows.

    (Jhoomar Mehta is a New Delhi-based public policy and development finance researcher while Karan Bhasin is a New Delhi-based economist. The views expressed in the column are their own)

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    Published: 22 Apr 2020, 10:52 AM IST
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